Treasuries Head for First Weekly Decline of 2014 Before Payrolls

U.S. employers added 180,000 workers last month, after hiring 74,000 in December, based on a Bloomberg survey before the Labor Department report at 8:30 a.m. in Washington. Photographer: Ben Torres/Bloomberg

Feb. 7 (Bloomberg) -- Treasury 10-year notes headed for
their first weekly decline this year on speculation a jobs
report today will encourage the Federal Reserve to keep reducing
its bond purchases.

The extra yield that benchmark Treasuries offer over their
Group of Seven counterparts was more than double the average
over the past year. Investors shifted record amounts out of U.S.
stock funds and into bonds in the week ended Feb. 5, according
to Citigroup Inc. American employers added more than twice as
many workers in January as in the prior month and the
unemployment rate held at a five-year low, economists project
the labor report will show today.

“The U.S. recovery and the taper can continue,” said Owen
Callan, an analyst at Danske Bank A/S in Dublin. “We could
easily see Treasury yields rally seven to eight basis points if
it’s a decent payrolls number. Most people view the recent U.S.
data blip as temporary.”

The U.S. 10-year yield was little changed at 2.71 percent
at 6:49 a.m. in New York, according to Bloomberg Bond Trader
data. The price of the 2.75 percent note maturing in November
2023 was 100 3/8. The yield has climbed six basis points, or
0.06 percentage point, this week.

While the Fed is reducing support for the economy, policy
makers in Europe and Japan are considering ways to keep down
borrowing costs to fuel growth. Treasuries yielded 46 basis
points more than their Group-of-Seven peers, compared with the
12-month average of 17 basis points, based on a customized
Bloomberg index. The spread was as wide as 54 basis points in
January, and was negative as recently as June.

Payroll Growth

U.S. employers added 180,000 workers in January, after
hiring 74,000 the prior month, based on a Bloomberg survey
before the Labor Department report at 8:30 a.m. in Washington.
The jobless rate stayed at 6.7 percent, the lowest since 2008, a
separate survey showed.

The Bloomberg U.S. Treasury Bond Index has fallen 0.2
percent this week. It gained 1.8 percent in January as the
slowdown in U.S. jobs boosted demand for the safest assets.

U.S. equity funds had $24 billion of outflows in the week
to Feb. 5, according to a report today from Citibank’s research
unit. Withdrawals from stock funds worldwide totaled $28.3
billion, the report said, citing data from EPFR Global, a fund
research company in Cambridge, Massachusetts.

Money managers put $13 billion into U.S. bond funds,
accounting for most of the $14.8 billion that flowed into debt
worldwide, the according to the report. The flow figures for the
period were records.

‘Foregone Conclusion’

The Federal Open Market Committee cut purchases of Treasury
and mortgage debt in January and again in February to $65
billion a month from $85 billion, citing an improving outlook
for the labor market. Janet Yellen took over leadership of the
central bank from Ben S. Bernanke at the start of this month.

“Tapering is a foregone conclusion,” Marvin Loh, a senior
fixed-income strategist at BNY Mellon Global Markets, said at a
seminar in Tokyo. “We’ve got an FOMC board that’s more hawkish
than it has been under the Bernanke administration.”

The Fed will end its asset-purchase program by the third
quarter, when 10-year Treasury yields will approach 3.25
percent, according to Loh. Yields may increase to 4 percent by
mid-2015, he said.

Low Inflation

European Central Bank President Mario Draghi said yesterday
the ECB may take action to counter low inflation as soon as next
month. Economists surveyed by Bloomberg Jan. 10-15 say the Bank
of Japan will expand its stimulus program, and a third of them
predict the increase will come in the second quarter.

The Fed will probably hold its target for overnight lending
between banks at a record low until early 2016, said Jan
Hatzius, the chief economist at Goldman Sachs Group Inc. U.S.
inflation signals are “quite benign,” Hatzius said at a
conference in Sydney. Goldman Sachs is one of the 21 primary
dealers that trade directly with the Fed.

Volatility in Treasuries as measured by the Bank of America
Merrill Lynch MOVE Index fell to 67.2 basis points yesterday
from a four-week high of 67.3 on Feb. 5.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell to $334.2 billion
yesterday. It increased to $494.3 billion on Jan. 29, the
highest level since June 24.